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Weekly FX Update - 31st October 2011

Written by Sam Coxhead on October 31st, 2011.      0 comments

5:45 PM (NZT)

Currency Commentaries:

Click to access our currency pair reports:  
NZD/USD                                      AUD/USD                                    GBP/USD
NZD/AUD (AUD/NZD)                    AUD/GBP (GBPAUD)                    GBP/EUR (EUR/GBP)
NZD/GBP (GBP/NZD)                    AUD/EUR (EUR/AUD)                   GBP/RAND

Major Announcements last week:

  • EU Summit produces headline results, but little detail or definitive actionable plans.
  • Chinese HSBC Manufacturing PMI 51.1 vs 49.9 previous.
  • NZ Inflation +.4% vs +.7% expected
  • Canadian Retail Sales +.4% vs +.4% expected
  • Bank of Canada leaves the cash rate unchanged as expected at 1.0%
  • Bank of Canada revises down growth forecasts for 2011 and 2012
  •  NZ NBNZ Business Confidence 13.2 from 30.3 previous
  • Australian Inflation +.3% vs +.7% expected
  • US Durable Goods sales (big ticket items) 1.7% vs +.5% expected
  • US New Home Sales 313k vs 302k expected
  • RBNZ leaves the cash rate unchanged as expected
  • US advanced GDP 3rd quarter 2.5% vs 2.4% expected
  • US revised UOM Consumer Sentiment 60.9 vs 58.1 expected
  • BOJ intervene directly in the markets buying USD and selling YEN

Market Overview:

Last week proved to be interesting for financial markets. There was a good mix of central bank focus, real economic news, and the financial focus of the EU summit on the European debt saga. The Reserve Bank of NZ (RBNZ), the Bank of Canada (BOC) and Bank of Japan (BOJ), all held their respective cash rates unchanged as expected. The economic news continued to be mixed with the slightly more positive tone in the US and Asia being countered by lower than expected indicators in the UK and Europe. The EU summit has proven to be a real roller coaster for sentiment. After positive noises a week out from the meetings, the days immediately before the meeting saw the risk aversion increase, and growth assets under some pressure. There were three apparent hurdles to success. The first two came quickly, the third finally achieved after all night deliberations. Positive market sentiment followed immediately after the release, as risk aversion trades were hurriedly unwound by investors. The optimism has now slowed, as the reality of the complex situation has again come to the fore.
In NZ the quarterly inflation number came in demonstratively lower than expected and this added to the downward pressure the New Zealand dollar saw coming into the EU summit. The RBNZ left the cash rate unchanged as expected, and acknowledged the issues in the global environment. But with the approaching stimulation of the Christchurch rebuild, and the seeming resilience of NZ’s Asian trading partners, the RBNZ finished their statement with the comment that the cash rate would have to increase, if the global impact on the NZ economy was limited. This morning’s September Building Consents numbers confirms the soft nature of the current recovery, with consents dropping 17.7% after two months of solid gains. The focus for the remainder of the week will be based on the labour market, with the labour cost index on Tuesday and 2nd quarter employment numbers on Thursday.
In Australia the news of the week was the lower than expected 3rd quarter inflation numbers. Following their release the odds of a 25pt cut to the 4.75% cash rate has been moving between 80 and 100%. The Reserve Bank of Australia (RBA) announce the cash rate Tuesday, ahead of building statistics Wednesday, retail sales Thursday, and their quarterly monetary policy statement on Friday. The Australian dollar saw an aggressive move higher in value following the EU summit last week. The move was driven by exiting of risk aversion trades by investors after the EU managed to cobble together a plan at the EU summit. This move saw the Australian dollar outperform across the board. The move looks potentially over done, considering the market pricing of a cut to the cash rate this week.
In the US the current run of more positive than expected economic data continues for the most part. The equity markets were particularly buoyant following the EU summit, and further talk has emerged about possible stimulatory polices from the Federal Reserve (FED). This week sees a busy calendar in the US, with various manufacturing and services numbers surrounded by the monetary policy announcement from the FED on Wednesday and the all important employment numbers on Friday. The US dollar has been under surprising pressure following the well intended but hollow plan in Europe. Potentially there is room for a bounce in fortune for the US dollar, on any negative news in Europe or Asia. BOJ intervention to weaken the YEN this afternoon has seen the US dollar rise 1.1% in terms of the US dollar index.
As mentioned above, the EU summit has managed to cobble together a plan to contain the current debts issues in Europe. The value of the plan will be in its execution. Quick action is required by authorities and this was clearly displayed as yield on Italian debt hit EURO-era highs on Friday, following a very disappointing Italian debt auction. The focus for this week will be on the European Central Bank (ECB) and their monetary policy decision on Thursday. With the economy in Europe under intense pressure, there is a small chance priced that they will cut the 1.5% cash rate by 25pts to 1.25%. A cut is a formality for the December meeting, on current pricing. Meanwhile the larger economies are being courted to support the European debt markets with their foreign exchange reserves, with China and Japan in particular gaining attention.
In the UK the economic data remains gloomy at best. The increasing chances of a return to recession is seeing the Government under increasing pressure to abandon their austerity plan and provide some stimulation to the flagging economy. Expect the noise surrounding fiscal plans in the UK to increase in the coming weeks. The prospect of decreasing tax takes should spur some action from the government currently suffering through inaction. Tuesday will be the focus in the UK, with housing, manufacturing and 3rd quarter growth numbers due for release.  
In Canada the BOC gave downward revisions of 2011 and 2012 growth forecasts in their monetary policy statement last week. This is mainly due to the soft nature of the US recovery and should not have come as a surprise, although the CAD did come under pressure following the statement. This week will be interesting for the Canadian economy with GDP on Tuesday and employment numbers on Friday.
In Japan almost the entire economic focus has been on the continued strength on the YEN. The set new record highs against the US dollar last week, and today the BOJ intervened directly in the market driving the YEN 4.5% lower against the USD at the time of writing. The intervention is in the USDYEN pairing, but feeds through to currencies across the board. This intervention comes on top of another 10% of funding for foreign asset purchases made available to Japanese corporate taking the amount to 55 Trillion YEN, or around 750 billion USD.
Of Note: Today the US financial broker MF Global looks to be on the brink of bankruptcy and is looking for a buyer at the last minute. If this institution is bankrupted, the  risk aversion should accelerate dues to the widespread counterparty issues involving credit.